Chapter 01 - Investments: Background and Issues

Chapter 01
Investments: Background and Issues

Multiple Choice Questions

1. Financial assets represent _____ of total assets of U.. households.
!. over "0#
B. over $0#
C. under 10#
%. a&out '0#

(. )eal assets in the econom* include all &ut +hich one of the follo+ing,
!. -and
B. Buildings
C. Consumer dura&les
%. Common stock

'. .et +orth represents _____ of the lia&ilities and net +orth of commercial &anks.
!. a&out /0#
B. a&out $0#
C. a&out 10#
%. a&out '0#

0. !ccording to the Flo+ of Funds !ccounts of the United tates1 the largest single asset of
U.. households is ___.
!. mutual fund shares
B. real estate
C. pension reserves
%. corporate e2uit*

1-1
Chapter 01 - Investments: Background and Issues
/. !ccording to the Flo+ of Funds !ccounts of the United tates1 the largest lia&ilit* of U..
households is ________.
!. mortgages
B. consumer credit
C. &ank loans
%. gam&ling de&ts

". ____ is not a derivative securit*.
!. ! share of common stock
B. ! call option
C. ! futures contract
%. !ll of the a&ove are derivative securities.

3. !ccording to the Flo+ of Funds !ccounts of the United tates1 the largest financial asset of
U.. households is ____.
!. mutual fund shares
B. corporate e2uit*
C. pension reserves
%. personal trusts

4. !ctive trading in markets and competition among securities anal*sts helps ensure that
__________.
I. securit* prices approach informational efficienc*
II. riskier securities are priced to offer higher potential returns
III. investors are unlikel* to &e a&le to consistentl* find under- or overvalued securities
!. I onl*
B. I and II onl*
C. II and III onl*
%. I1 II and III

1-(
Chapter 01 - Investments: Background and Issues
$. 5he material +ealth of societ* is determined &* the econom*6s _________1 +hich is a
function of the econom*6s _________.
!. investment &ankers1 financial assets
B. investment &ankers1 real assets
C. productive capacit*1 financial assets
%. productive capacit*1 real assets

10. 7hich of the follo+ing is not a mone* market securit*,
!. U.. 5reasur* &ill
B. i8 month maturit* certificate of deposit
C. Common stock
%. Banker6s acceptance

11. __________ assets generate net income to the econom* and __________ assets define
allocation of income among investors.
!. Financial1 financial
B. Financial1 real
C. )eal1 financial
%. )eal1 real

1(. 7hich of the follo+ing are financial assets,
I. %e&t securities
II. 92uit* securities
III. %erivative securities
!. I onl*
B. I and II onl*
C. II and III onl*
%. I1 II and III

1'. __________ are e8amples of financial intermediaries.
!. Commercial &anks
B. Insurance companies
C. Investment companies
%. !ll of the a&ove are financial intermediaries

1-'
Chapter 01 - Investments: Background and Issues
10. !sset allocation refers to the _________.
!. allocation of the investment portfolio across &road asset classes
B. anal*sis of the value of securities
C. choice of specific assets +ithin each asset class
%. none of the ans+ers define asset allocation

1/. 7hich one of the follo+ing &est descri&es the purpose of derivatives markets,
!. 5ransferring risk from one part* to another
B. Investing for a short time period to earn a small rate of return
C. Investing for retirement
%. 9arning interest income

1". __________ +as the first to introduce mortgage pass-through securities.
!. Chase :anhattan
B. Citicorp
C. F.:!
%. ;.:!

13. ecurit* selection refers to the ________.
!. allocation of the investment portfolio across &road asset classes
B. anal*sis of the value of securities
C. choice of specific securities +ithin each asset class
%. top do+n method of investing

14. _____ is an e8ample of an agenc* pro&lem.
!. :anagers engage in empire &uilding
B. :anagers protect their <o&s &* avoiding risk* pro<ects
C. :anagers over consume lu8uries such as corporate <ets
%. !ll of the ans+ers provide e8amples of agenc* pro&lems

1-0
Chapter 01 - Investments: Background and Issues
1$. _____ is a mechanism to mitigate potential agenc* pro&lems.
!. 5*ing income of managers to success of the firm
B. %irectors defending top management
C. !nti takeover strategies
%. traight voting method of electing the &oard of directors

(0. __________ are real assets.
!. Bonds
B. =roduction e2uipment
C. tocks
%. Commercial paper

(1. __________ portfolio construction starts +ith selecting attractivel* priced securities.
!. Bottom-up
B. 5op-do+n
C. Upside-do+n
%. ide-to-side

((. In a capitalist s*stem capital resources are primaril* allocated &* ____________.
!. governments
B. the 9C
C. financial markets
%. investment &ankers

('. ! __________ represents an o+nership share in a corporation.
!. call option
B. common stock
C. fi8ed-income securit*
%. preferred stock

1-/
Chapter 01 - Investments: Background and Issues
(0. 5he value of a derivative securit* _________.
!. depends on the value of other related securit*
B. affects the value of a related securit*
C. is unrelated to the value of a related securit*
%. can onl* &e integrated &* calculus professors

(/. ! &ond issue is &roken up so that some investors +ill receive interest pa*ments +hile
others +ill receive principal pa*ments. 5his is an e8ample of _________.
!. &undling
B. credit enhancement
C. securiti>ation
%. un&undling

(". __________ portfolio management calls for holding diversified portfolios +ithout
spending effort or resources attempting to improve investment performance through securit*
anal*sis.
!. !ctive
B. :omentum
C. =assive
%. :arket timing

(3. Financial markets allo+ for all &ut +hich one of the follo+ing,
!. hift consumption through time from higher income periods to lo+er
B. =rice securities according to their riskiness
C. Channel funds from lenders of funds to &orro+ers of funds
%. !llo+ most participants to routinel* earn high returns +ith lo+ risk

(4. Financial intermediaries e8ist &ecause small investors cannot efficientl* _________.
!. diversif* their portfolios
B. gather information
C. monitor their portfolios
%. all of the ans+ers provide reasons +h*

1-"
Chapter 01 - Investments: Background and Issues
($. :ethods to encourage managers to act in shareholders6 &est interest include
I. 5hreat of takeover
II. =ro8* fights for control of the Board of %irectors
III. 5*ing managers6 compensation to stock price performance
!. I onl*
B. I and II onl*
C. II and III onl*
%. I1 II and III

'0. Firms that speciali>e in helping companies raise capital &* selling securities to the pu&lic
are called _________.
!. pension funds
B. investment &anks
C. savings &anks
%. )9I5s

'1. In securities markets1 there should &e a risk-return trade-off +ith higher-risk assets having
_________ e8pected returns than lo+er-risk assets.
!. higher
B. lo+er
C. the same
%. Can6t tell from the information given

'(. __________ are an indirect +a* U.. investors can invest in foreign companies.
!. !%)s
B. I)!s
C. %)s
%. C=Cs

''. ecurit* selection refers to _________.
!. choosing specific securities +ithin each asset-class
B. deciding ho+ much to invest in each asset-class
C. deciding ho+ much to invest in the market portfolio versus the riskless asset
%. deciding ho+ much to hedge

1-3
Chapter 01 - Investments: Background and Issues
'0. !n e8ample of a derivative securit* is _________.
!. a common share of ;eneral :otors
B. a call option on Intel stock
C. a Ford &ond
%. a U.. 5reasur* &ond

'/. __________ portfolio construction starts +ith asset allocation.
!. Bottom-up
B. 5op-do+n
C. Upside-do+n
%. ide-to-side

'". 7hich one of the follo+ing firms falsel* claimed to have a ?0.4 &illion &ank account at
Bank of !merica and vastl* understated its de&ts1 eventuall* resulting in the firm6s
&ankruptc*,
!. 7orldCom
B. 9nron
C. =armalat
%. ;lo&al Crossing

'3. %e&t securities promise _________.
I. a fi8ed stream of income
II. a stream of income that is determined according to a specific formula
III. a share in the profits of the issuing entit*
!. I onl*
B. I or II onl*
C. I and III onl*
%. II or III onl*

1-4
Chapter 01 - Investments: Background and Issues
'4. 5he ar&anes-@8le* !ct tightened corporate governance rules &* re2uiring all &ut +hich
one of the follo+ing,
!. )e2uired corporations to have more independent directors
B. )e2uired the CF@ to personall* vouch for the corporation6s financial statements
C. )e2uired that firms could no longer emplo* investment &ankers to sell securities to the
pu&lic
%. 5he creation of a ne+ &oard to oversee the auditing of pu&lic companies

'$. 5he success of common stock investments depends on the success of _________.
!. derivative securities
B. fi8ed income securities
C. the firm and its real assets
%. government methods of allocating capital

00. 5he historical average rate of return on the large compan* stocks since 1$(" has &een
!. /#
B. 4#
C. 1(#
%. (0#

01. 5he average rate of return on U.. 5reasur* &ills since 1$(" +as _________.
!. 0./#
B. (.0#
C. '.4#
%. ".0#

0(. !n e8ample of a real asset is _________.
I. a college education
II. customer good+ill
III. a patent
!. I onl*
B. II onl*
C. I and III onl*
%. I1 II and III

1-$
Chapter 01 - Investments: Background and Issues
0'. 5he (00( la+ designed to improve corporate governance is titled the
!. =ension )eform !ct
B. 9)I!
C. Financial ervices :oderni>ation !ct
%. ar&anes-@8le* !ct

00. 7hich of the follo+ing is not a financial intermediar*,
!. a mutual fund
B. an insurance compan*
C. a real estate &rokerage firm
%. a savings and loan compan*

0/. 5he com&ined lia&ilities of !merican households represent appro8imatel* __________
percent of com&ined assets.
!. 11#
B. (1#
C. (/#
%. ''#

0". In (004 real assets represented appro8imatel* __________ percent of the total asset
holdings of !merican households.
!. '3#
B. 0(#
C. 04#
%. //#

03. In (004 mortgages represented appro8imatel* __________ percent of total lia&ilities and
net +orth of !merican households.
!. 1(#
B. 1/#
C. (4#
%. 0(#

1-10
Chapter 01 - Investments: Background and Issues
04. -ia&ilities e2ual appro8imatel* _____ of total assets for nonfinancial U.. &usinesses.
!. 10#
B. (/#
C. 00#
%. 3/#

0$. 7hich of the follo+ing is not an e8ample of a financial intermediar*,
!. ;oldman achs
B. !llstate Insurance
C. First Interstate Bank
%. IB:

/0. )eal assets represent a&out ____ of total assets for financial institutions.
!. 1#
B. 1/#
C. (/#
%. 00#

/1. :one* :arket securities are characteri>ed &* ________.
I. maturit* less than one *ear
II. safet* of the principal investment
III. lo+ rates of return
!. I onl*
B. I and II onl*
C. I and III onl*
%. I1 II and III

/(. !fter much investigation an investor finds that Intel stock is currentl* under priced. 5his
is an e8ample of ______.
!. asset allocation
B. securit* anal*sis
C. top do+n portfolio management
%. passive management

1-11
Chapter 01 - Investments: Background and Issues
/'. !fter considering current market conditions an investor decides to place "0# of their
funds in e2uities and the rest in &onds. 5his is an e8ample of
!. asset allocation
B. securit* anal*sis
C. top do+n portfolio management
%. passive management

/0. uppose an investor is considering one of t+o investments +hich are identical in all
respects e8cept for risk. If the investor anticipates a fair return for the risk of the securit* the*
invest in the* can e8pect to
!. earn no more than the 5reasur* &ill rate on either securit*
B. pa* less for the securit* that has higher risk
C. pa* less for the securit* that has lo+er risk
%. earn more if interest rates are lo+er

//. 5he efficient markets h*pothesis suggests that _______.
!. active portfolio management strategies are the most appropriate investment strategies
B. passive portfolio management strategies are the most appropriate investment strategies
C. either active or passive strategies ma* &e appropriate1 depending on the e8pected direction
of the market
%. a &ottom up approach is the most appropriate investment strateg*

/". In a perfectl* efficient market the &est investment strateg* is pro&a&l* aAan
!. active strateg*
B. passive strateg*
C. asset allocation
%. market timing

/3. !n important trend that has changed the contemporar* investment market is _________.
!. financial engineering
B. glo&ali>ation
C. securiti>ation
%. all three of the other ans+ers

1-1(
Chapter 01 - Investments: Background and Issues
/4. ecuriti>ation refers to the creation of ne+ securities &* _________.
!. selling individual cash flo+s of a securit* or loan
B. repackaging individual cash flo+s of a securit* or loan into a ne+ pa*ment pattern
C. taking an illi2uid asset and converting it into a marketa&le securit*
%. selling financial services overseas as +ell as in the U..

/$. Brad* &onds +ere an e8ample of _________.
!. securiti>ation
B. mortgagi>ation
C. &undling
%. pass through securities

"0. Individuals ma* find it more advantageous to purchase claims from a financial
intermediar* rather than directl* purchasing claims in capital markets &ecause
I. intermediaries are &etter diversified than most individuals
II. intermediaries can e8ploit economies of scale in investing that individual investors cannot
III. intermediated investments usuall* offer higher rates of return than direct capital market
claims
!. I onl*
B. I and II onl*
C. II and III onl*
%. I1 II and III

"1. urf Cit* oft+are Compan* develops ne+ surf forecasting soft+are. It sells the soft+are
to :icrosoft in e8change for 1000 shares of :icrosoft common stock. urf Cit* oft+are has
e8changed a _____ asset for a _____ asset in this transaction.
!. real1 real
B. financial1 financial
C. real1 financial
%. financial1 real

1-1'
Chapter 01 - Investments: Background and Issues
"(. tone Bar&or =roducts takes out a &ank loan. It receives ?1001000 and signs a promissor*
note to pa* &ack the loan over / *ears.
!. ! ne+ financial asset +as created in this transaction.
B. ! financial asset +as traded for a real asset in this transaction.
C. ! financial asset +as destro*ed in this transaction.
%. ! real asset +as created in this transaction.

"'. 7hich of the follo+ing firms +as not engaged in a ma<or accounting scandal &et+een
(000 and (00/,
!. ;eneral 9lectric
B. =armalat
C. 9nron
%. 7orldCom

"0. !ccounting scandals can often &e attri&uted to a particular concept in the stud* of finance
kno+n as the
!. agenc* pro&lem
B. risk - return trade - off
C. allocation of risk
%. securiti>ation

"/. !n intermediar* that pools and manage funds for man* investors is called aAan ______.
!. investment compan*
B. savings and loan
C. investment &anker
%. !%)

"". Financial institutions that speciali>e in assisting corporations in primar* market
transactions are called _______.
!. mutual funds
B. investment &ankers
C. pension funds
%. glo&ali>ation specialists

1-10
Chapter 01 - Investments: Background and Issues
"3. 79B allo+ investors to _______.
!. invest in U.. mortgage &acked securities
B. invest in an individual foreign stock
C. invest in a portfolio of foreign stocks
%. avoid an* e8posure to foreign e8change risk

"4. In (004 the largest corporate &ankruptc* in the U.. histor* involved the investment
&anking firm of ______.
!. ;oldman achs
B. -ehman Brothers
C. :organ tanle*
%. :errill -*nch

"$. 5he ina&ilit* of shareholders to influence the decisions of managers1 despite
over+helming shareholder support1 is a &reakdo+n in +hat process or mechanism,
!. !uditing
B. =u&lic finance
C. Corporate governance
%. =u&lic reporting

30. )eal assets are ______.
!. are assets used to produce goods and services
B. al+a*s the same as financial assets
C. al+a*s e2ual to lia&ilities
%. claims on compan*6s income

31. ! ma<or cause of mortgage market meltdo+n in (003 and (004 +as linked to ________.
!. glo&ali>ation
B. securiti>ation
C. negative anal*st recommendations
%. online trading

1-1/
Chapter 01 - Investments: Background and Issues
3(. In recent *ears the greatest dollar amount of securiti>ation occurred for +hich t*pe loan,
!. Bome mortgages
B. Credit card de&t
C. !utomo&ile loans
%. 92uipment leasing

3'. 5he process of securiti>ing poor 2ualit* &ank loans made to developing nations resulted in
the creation of __________.
!. =ass-throughs
B. Brad* &onds
C. 79B
%. FB-:C participation certificates

30. U.. 5reasur* &onds pa* interest ever* si8 months and repa* the principal at maturit*. 5he
U.. 5reasur* routinel* sells individual interest pa*ments on these &onds to investors. 5his is
an e8ample of ___________.
!. un&undling
B. &undling
C. securiti>ation
%. securit* selection

3/. !n investment advisor has decided to purchase gold1 real estate1 stocks1 and &onds in
e2ual amounts. 5his decision reflects +hich part of the investment process,
!. !sset allocation
B. Investment anal*sis
C. =ortfolio anal*sis
%. ecurit* selection

Chapter 01 Investments: Background and Issues !ns+er Ce*


Multiple Choice Questions

1-1"
Chapter 01 - Investments: Background and Issues
1. Financial assets represent _____ of total assets of U.. households.
A. over "0#
B. over $0#
C. under 10#
%. a&out '0#

Difficulty: Easy

(. )eal assets in the econom* include all &ut +hich one of the follo+ing,
!. -and
B. Buildings
C. Consumer dura&les
D. Common stock

Difficulty: Easy

'. .et +orth represents _____ of the lia&ilities and net +orth of commercial &anks.
!. a&out /0#
B. a&out $0#
C. a&out 10#
%. a&out '0#

Difficulty: Medium

0. !ccording to the Flo+ of Funds !ccounts of the United tates1 the largest single asset of
U.. households is ___.
!. mutual fund shares
B. real estate
C. pension reserves
%. corporate e2uit*

Difficulty: Medium

1-13
Chapter 01 - Investments: Background and Issues
/. !ccording to the Flo+ of Funds !ccounts of the United tates1 the largest lia&ilit* of U..
households is ________.
A. mortgages
B. consumer credit
C. &ank loans
%. gam&ling de&ts

Difficulty: Medium

". ____ is not a derivative securit*.
A. ! share of common stock
B. ! call option
C. ! futures contract
%. !ll of the a&ove are derivative securities.

Difficulty: Easy

3. !ccording to the Flo+ of Funds !ccounts of the United tates1 the largest financial asset of
U.. households is ____.
!. mutual fund shares
B. corporate e2uit*
C. pension reserves
%. personal trusts

Difficulty: Medium

1-14
Chapter 01 - Investments: Background and Issues
4. !ctive trading in markets and competition among securities anal*sts helps ensure that
__________.
I. securit* prices approach informational efficienc*
II. riskier securities are priced to offer higher potential returns
III. investors are unlikel* to &e a&le to consistentl* find under- or overvalued securities
!. I onl*
B. I and II onl*
C. II and III onl*
D. I1 II and III

Difficulty: Hard

$. 5he material +ealth of societ* is determined &* the econom*6s _________1 +hich is a
function of the econom*6s _________.
!. investment &ankers1 financial assets
B. investment &ankers1 real assets
C. productive capacit*1 financial assets
D. productive capacit*1 real assets

Difficulty: Medium

10. 7hich of the follo+ing is not a mone* market securit*,
!. U.. 5reasur* &ill
B. i8 month maturit* certificate of deposit
C. Common stock
%. Banker6s acceptance

Difficulty: Medium

1-1$
Chapter 01 - Investments: Background and Issues
11. __________ assets generate net income to the econom* and __________ assets define
allocation of income among investors.
!. Financial1 financial
B. Financial1 real
C. )eal1 financial
%. )eal1 real

Difficulty: Medium

1(. 7hich of the follo+ing are financial assets,
I. %e&t securities
II. 92uit* securities
III. %erivative securities
!. I onl*
B. I and II onl*
C. II and III onl*
D. I1 II and III

Difficulty: Hard

1'. __________ are e8amples of financial intermediaries.
!. Commercial &anks
B. Insurance companies
C. Investment companies
D. !ll of the a&ove are financial intermediaries

Difficulty: Easy

10. !sset allocation refers to the _________.
A. allocation of the investment portfolio across &road asset classes
B. anal*sis of the value of securities
C. choice of specific assets +ithin each asset class
%. none of the ans+ers define asset allocation

Difficulty: Easy

1-(0
Chapter 01 - Investments: Background and Issues
1/. 7hich one of the follo+ing &est descri&es the purpose of derivatives markets,
A. 5ransferring risk from one part* to another
B. Investing for a short time period to earn a small rate of return
C. Investing for retirement
%. 9arning interest income

Difficulty: Medium

1". __________ +as the first to introduce mortgage pass-through securities.
!. Chase :anhattan
B. Citicorp
C. F.:!
D. ;.:!

Difficulty: Easy

13. ecurit* selection refers to the ________.
!. allocation of the investment portfolio across &road asset classes
B. anal*sis of the value of securities
C. choice of specific securities +ithin each asset class
%. top do+n method of investing

Difficulty: Medium

14. _____ is an e8ample of an agenc* pro&lem.
!. :anagers engage in empire &uilding
B. :anagers protect their <o&s &* avoiding risk* pro<ects
C. :anagers over consume lu8uries such as corporate <ets
D. !ll of the ans+ers provide e8amples of agenc* pro&lems

Difficulty: Easy

1-(1
Chapter 01 - Investments: Background and Issues
1$. _____ is a mechanism to mitigate potential agenc* pro&lems.
A. 5*ing income of managers to success of the firm
B. %irectors defending top management
C. !nti takeover strategies
%. traight voting method of electing the &oard of directors

Difficulty: Hard

(0. __________ are real assets.
!. Bonds
B. =roduction e2uipment
C. tocks
%. Commercial paper

Difficulty: Easy

(1. __________ portfolio construction starts +ith selecting attractivel* priced securities.
A. Bottom-up
B. 5op-do+n
C. Upside-do+n
%. ide-to-side

Difficulty: Easy

((. In a capitalist s*stem capital resources are primaril* allocated &* ____________.
!. governments
B. the 9C
C. financial markets
%. investment &ankers

Difficulty: Easy

1-((
Chapter 01 - Investments: Background and Issues
('. ! __________ represents an o+nership share in a corporation.
!. call option
B. common stock
C. fi8ed-income securit*
%. preferred stock

Difficulty: Easy

(0. 5he value of a derivative securit* _________.
A. depends on the value of other related securit*
B. affects the value of a related securit*
C. is unrelated to the value of a related securit*
%. can onl* &e integrated &* calculus professors

Difficulty: Easy

(/. ! &ond issue is &roken up so that some investors +ill receive interest pa*ments +hile
others +ill receive principal pa*ments. 5his is an e8ample of _________.
!. &undling
B. credit enhancement
C. securiti>ation
D. un&undling

Difficulty: Easy

(". __________ portfolio management calls for holding diversified portfolios +ithout
spending effort or resources attempting to improve investment performance through securit*
anal*sis.
!. !ctive
B. :omentum
C. =assive
%. :arket timing

Difficulty: Easy

1-('
Chapter 01 - Investments: Background and Issues
(3. Financial markets allo+ for all &ut +hich one of the follo+ing,
!. hift consumption through time from higher income periods to lo+er
B. =rice securities according to their riskiness
C. Channel funds from lenders of funds to &orro+ers of funds
D. !llo+ most participants to routinel* earn high returns +ith lo+ risk

Difficulty: Moderate

(4. Financial intermediaries e8ist &ecause small investors cannot efficientl* _________.
!. diversif* their portfolios
B. gather information
C. monitor their portfolios
D. all of the ans+ers provide reasons +h*

Difficulty: Easy

($. :ethods to encourage managers to act in shareholders6 &est interest include
I. 5hreat of takeover
II. =ro8* fights for control of the Board of %irectors
III. 5*ing managers6 compensation to stock price performance
!. I onl*
B. I and II onl*
C. II and III onl*
D. I1 II and III

Difficulty: Easy

'0. Firms that speciali>e in helping companies raise capital &* selling securities to the pu&lic
are called _________.
!. pension funds
B. investment &anks
C. savings &anks
%. )9I5s

Difficulty: Easy

1-(0
Chapter 01 - Investments: Background and Issues
'1. In securities markets1 there should &e a risk-return trade-off +ith higher-risk assets having
_________ e8pected returns than lo+er-risk assets.
A. higher
B. lo+er
C. the same
%. Can6t tell from the information given

Difficulty: Easy

'(. __________ are an indirect +a* U.. investors can invest in foreign companies.
A. !%)s
B. I)!s
C. %)s
%. C=Cs

Difficulty: Easy

''. ecurit* selection refers to _________.
A. choosing specific securities +ithin each asset-class
B. deciding ho+ much to invest in each asset-class
C. deciding ho+ much to invest in the market portfolio versus the riskless asset
%. deciding ho+ much to hedge

Difficulty: Easy

'0. !n e8ample of a derivative securit* is _________.
!. a common share of ;eneral :otors
B. a call option on Intel stock
C. a Ford &ond
%. a U.. 5reasur* &ond

Difficulty: Easy

1-(/
Chapter 01 - Investments: Background and Issues
'/. __________ portfolio construction starts +ith asset allocation.
!. Bottom-up
B. 5op-do+n
C. Upside-do+n
%. ide-to-side

Difficulty: Easy

'". 7hich one of the follo+ing firms falsel* claimed to have a ?0.4 &illion &ank account at
Bank of !merica and vastl* understated its de&ts1 eventuall* resulting in the firm6s
&ankruptc*,
!. 7orldCom
B. 9nron
C. =armalat
%. ;lo&al Crossing

Difficulty: Medium

'3. %e&t securities promise _________.
I. a fi8ed stream of income
II. a stream of income that is determined according to a specific formula
III. a share in the profits of the issuing entit*
!. I onl*
B. I or II onl*
C. I and III onl*
%. II or III onl*

Difficulty: Medium

1-("
Chapter 01 - Investments: Background and Issues
'4. 5he ar&anes-@8le* !ct tightened corporate governance rules &* re2uiring all &ut +hich
one of the follo+ing,
!. )e2uired corporations to have more independent directors
B. )e2uired the CF@ to personall* vouch for the corporation6s financial statements
C. )e2uired that firms could no longer emplo* investment &ankers to sell securities to the
pu&lic
%. 5he creation of a ne+ &oard to oversee the auditing of pu&lic companies

Difficulty: Medium

'$. 5he success of common stock investments depends on the success of _________.
!. derivative securities
B. fi8ed income securities
C. the firm and its real assets
%. government methods of allocating capital

Difficulty: Easy

00. 5he historical average rate of return on the large compan* stocks since 1$(" has &een
!. /#
B. 4#
C. 1(#
%. (0#

Difficulty: Medium

01. 5he average rate of return on U.. 5reasur* &ills since 1$(" +as _________.
!. 0./#
B. (.0#
C. '.4#
%. ".0#

Difficulty: Medium

1-(3
Chapter 01 - Investments: Background and Issues
0(. !n e8ample of a real asset is _________.
I. a college education
II. customer good+ill
III. a patent
!. I onl*
B. II onl*
C. I and III onl*
D. I1 II and III

Difficulty: Medium

0'. 5he (00( la+ designed to improve corporate governance is titled the
!. =ension )eform !ct
B. 9)I!
C. Financial ervices :oderni>ation !ct
D. ar&anes-@8le* !ct

Difficulty: Easy

00. 7hich of the follo+ing is not a financial intermediar*,
!. a mutual fund
B. an insurance compan*
C. a real estate &rokerage firm
%. a savings and loan compan*

Difficulty: Medium

0/. 5he com&ined lia&ilities of !merican households represent appro8imatel* __________
percent of com&ined assets.
!. 11#
B. (1#
C. (/#
%. ''#

Difficulty: Medium

1-(4
Chapter 01 - Investments: Background and Issues
0". In (004 real assets represented appro8imatel* __________ percent of the total asset
holdings of !merican households.
A. '3#
B. 0(#
C. 04#
%. //#

Difficulty: Medium

03. In (004 mortgages represented appro8imatel* __________ percent of total lia&ilities and
net +orth of !merican households.
!. 1(#
B. 1/#
C. (4#
%. 0(#

Difficulty: Medium

04. -ia&ilities e2ual appro8imatel* _____ of total assets for nonfinancial U.. &usinesses.
!. 10#
B. (/#
C. 00#
%. 3/#

Difficulty: Medium

0$. 7hich of the follo+ing is not an e8ample of a financial intermediar*,
!. ;oldman achs
B. !llstate Insurance
C. First Interstate Bank
D. IB:

Difficulty: Easy

1-($
Chapter 01 - Investments: Background and Issues
/0. )eal assets represent a&out ____ of total assets for financial institutions.
A. 1#
B. 1/#
C. (/#
%. 00#

Difficulty: Medium

/1. :one* :arket securities are characteri>ed &* ________.
I. maturit* less than one *ear
II. safet* of the principal investment
III. lo+ rates of return
!. I onl*
B. I and II onl*
C. I and III onl*
D. I1 II and III

Difficulty: Easy

/(. !fter much investigation an investor finds that Intel stock is currentl* under priced. 5his
is an e8ample of ______.
!. asset allocation
B. securit* anal*sis
C. top do+n portfolio management
%. passive management

Difficulty: Medium

/'. !fter considering current market conditions an investor decides to place "0# of their
funds in e2uities and the rest in &onds. 5his is an e8ample of
A. asset allocation
B. securit* anal*sis
C. top do+n portfolio management
%. passive management

Difficulty: Medium

1-'0
Chapter 01 - Investments: Background and Issues
/0. uppose an investor is considering one of t+o investments +hich are identical in all
respects e8cept for risk. If the investor anticipates a fair return for the risk of the securit* the*
invest in the* can e8pect to
!. earn no more than the 5reasur* &ill rate on either securit*
B. pa* less for the securit* that has higher risk
C. pa* less for the securit* that has lo+er risk
%. earn more if interest rates are lo+er

Difficulty: Hard

//. 5he efficient markets h*pothesis suggests that _______.
!. active portfolio management strategies are the most appropriate investment strategies
B. passive portfolio management strategies are the most appropriate investment strategies
C. either active or passive strategies ma* &e appropriate1 depending on the e8pected direction
of the market
%. a &ottom up approach is the most appropriate investment strateg*

Difficulty: Easy

/". In a perfectl* efficient market the &est investment strateg* is pro&a&l* aAan
!. active strateg*
B. passive strateg*
C. asset allocation
%. market timing

Difficulty: Easy

/3. !n important trend that has changed the contemporar* investment market is _________.
!. financial engineering
B. glo&ali>ation
C. securiti>ation
D. all three of the other ans+ers

Difficulty: Easy

1-'1
Chapter 01 - Investments: Background and Issues
/4. ecuriti>ation refers to the creation of ne+ securities &* _________.
!. selling individual cash flo+s of a securit* or loan
B. repackaging individual cash flo+s of a securit* or loan into a ne+ pa*ment pattern
C. taking an illi2uid asset and converting it into a marketa&le securit*
%. selling financial services overseas as +ell as in the U..

Difficulty: Easy

/$. Brad* &onds +ere an e8ample of _________.
!. securiti>ation
B. mortgagi>ation
C. &undling
%. pass through securities

Difficulty: Medium

"0. Individuals ma* find it more advantageous to purchase claims from a financial
intermediar* rather than directl* purchasing claims in capital markets &ecause
I. intermediaries are &etter diversified than most individuals
II. intermediaries can e8ploit economies of scale in investing that individual investors cannot
III. intermediated investments usuall* offer higher rates of return than direct capital market
claims
!. I onl*
B. I and II onl*
C. II and III onl*
%. I1 II and III

Difficulty: Hard

1-'(
Chapter 01 - Investments: Background and Issues
"1. urf Cit* oft+are Compan* develops ne+ surf forecasting soft+are. It sells the soft+are
to :icrosoft in e8change for 1000 shares of :icrosoft common stock. urf Cit* oft+are has
e8changed a _____ asset for a _____ asset in this transaction.
!. real1 real
B. financial1 financial
C. real1 financial
%. financial1 real

Difficulty: Medium

"(. tone Bar&or =roducts takes out a &ank loan. It receives ?1001000 and signs a promissor*
note to pa* &ack the loan over / *ears.
A. ! ne+ financial asset +as created in this transaction.
B. ! financial asset +as traded for a real asset in this transaction.
C. ! financial asset +as destro*ed in this transaction.
%. ! real asset +as created in this transaction.

Difficulty: Hard

"'. 7hich of the follo+ing firms +as not engaged in a ma<or accounting scandal &et+een
(000 and (00/,
A. ;eneral 9lectric
B. =armalat
C. 9nron
%. 7orldCom

Difficulty: Easy

"0. !ccounting scandals can often &e attri&uted to a particular concept in the stud* of finance
kno+n as the
A. agenc* pro&lem
B. risk - return trade - off
C. allocation of risk
%. securiti>ation

Difficulty: Easy

1-''
Chapter 01 - Investments: Background and Issues
"/. !n intermediar* that pools and manage funds for man* investors is called aAan ______.
A. investment compan*
B. savings and loan
C. investment &anker
%. !%)

Difficulty: Easy

"". Financial institutions that speciali>e in assisting corporations in primar* market
transactions are called _______.
!. mutual funds
B. investment &ankers
C. pension funds
%. glo&ali>ation specialists

Difficulty: Easy

"3. 79B allo+ investors to _______.
!. invest in U.. mortgage &acked securities
B. invest in an individual foreign stock
C. invest in a portfolio of foreign stocks
%. avoid an* e8posure to foreign e8change risk

Difficulty: Medium

"4. In (004 the largest corporate &ankruptc* in the U.. histor* involved the investment
&anking firm of ______.
!. ;oldman achs
B. -ehman Brothers
C. :organ tanle*
%. :errill -*nch

Difficulty: Medium

1-'0
Chapter 01 - Investments: Background and Issues
"$. 5he ina&ilit* of shareholders to influence the decisions of managers1 despite
over+helming shareholder support1 is a &reakdo+n in +hat process or mechanism,
!. !uditing
B. =u&lic finance
C. Corporate governance
%. =u&lic reporting

Difficulty: Medium

30. )eal assets are ______.
A. are assets used to produce goods and services
B. al+a*s the same as financial assets
C. al+a*s e2ual to lia&ilities
%. claims on compan*6s income

Difficulty: Easy

31. ! ma<or cause of mortgage market meltdo+n in (003 and (004 +as linked to ________.
!. glo&ali>ation
B. securiti>ation
C. negative anal*st recommendations
%. online trading

Difficulty: Medium

3(. In recent *ears the greatest dollar amount of securiti>ation occurred for +hich t*pe loan,
A. Bome mortgages
B. Credit card de&t
C. !utomo&ile loans
%. 92uipment leasing

Difficulty: Medium

1-'/
Chapter 01 - Investments: Background and Issues
3'. 5he process of securiti>ing poor 2ualit* &ank loans made to developing nations resulted in
the creation of __________.
!. =ass-throughs
B. Brad* &onds
C. 79B
%. FB-:C participation certificates

Difficulty: Medium

30. U.. 5reasur* &onds pa* interest ever* si8 months and repa* the principal at maturit*. 5he
U.. 5reasur* routinel* sells individual interest pa*ments on these &onds to investors. 5his is
an e8ample of ___________.
A. un&undling
B. &undling
C. securiti>ation
%. securit* selection

Difficulty: Medium

3/. !n investment advisor has decided to purchase gold1 real estate1 stocks1 and &onds in
e2ual amounts. 5his decision reflects +hich part of the investment process,
A. !sset allocation
B. Investment anal*sis
C. =ortfolio anal*sis
%. ecurit* selection

Difficulty: Medium

1-'"